Following the global financial crisis, Korea recorded an average export growth rate of -1.8% for 2012-2015, and has not yet recovered its growth rate of 19.1% in 2003-2007 before the crisis. Considering the important role played by export growth throughout Korea's economic growth, a significant part of the recent decline in economic growth can be attributed to this slowdown in export growth. This study focuses on the relationship between financial constraints and exports in order to elicit policy implications for boosting export growth.
  In an analysis using firm-level data, we found that the financial constraint on the supply side of funds contributed to the decrease of exports. The financial shock to the banking sector, which supplied more than 70% of the external funds in 2015, has been found to affect exports of Korean firms. This main result is robust to another index representing the health of banks and different empirical model specifications including firm fixed effect, alternative variable transformation, and an empirical model considering the endogeneity problem. Small and medium-sized enterprises (SMEs) are more sensitive to the health of banks than large firms, and, among the top four manufacturing industries with a high proportion of exports, metal processing products are particularly vulnerable to financial constraints.
  Another empirical analysis using industry-level data again showed that the financial constraints are closely related to decline in export. Debt dependency ratio and tangible asset ratio were used as variables that indicate industry-level financial constraints. Having a higher debt dependency ratio and tangible asset ratio signifies a lower level of restrictions from borrowing in the financial market. An industry with a high financial constraint is more likely to show a large decline in exports as the cost of funds increases. By firm size, SMEs are more sensitive to financial constraints than large firms, as they both face the same financial costs. A classification of exports by item characteristics (e.g. capital goods, raw materials, consumer goods) shows that the financial constraints have a greater impact on exports of capital goods and raw materials. In the case of consumer goods, the effect of financial constraints on exports was not significant. However, further analysis of detailed consumer goods showed that consumer discretionary goods turned out to be sensitive to such financial constraints.
  The policy implications suggested in this report include an improvement in the health of banks, recognizing the different effect of financial constraints on exports by firm and industry characteristics, and the need for micro-financial policies. In relation to improving the health of banks, we propose improving loan examinations. This would involve an enhancement of the expertise employed to identify companies (or industries) that are expected to bring high profitability in the future. We also emphasize that the perception of policy authorities on the different effects of financial constraints on exports by firm and industry characteristics is a very important factor for the effective implementation of policies. By enterprise size, SMEs are more vulnerable to financial constraints than large firms. Therefore, policies to mitigate financial constraints on SMEs would be more effective. Since the relationship between financial constraints and exports is very different from one industry to another, we also emphasize the need for micro-financial policies. In Korea, financial constraints are more relevant to mid- to long-term economic growth rather than short-term economic fluctuations, indicating that policies related to financial constraints need to focus on the mid- to long-term. As the meaning of debt ratio is interpreted differently in empirical results for firm- and industry-level data, the policy maker should take this into account when establishing policies for individual firms and industries.
  The implementation of micro-finance policies that reflect the different effects of financial constraints on exports by firm and industry characteristics will serve as an effective policy option for policy authorities, as an additional policy instrument complementing existing monetary and fiscal policies. If the firms (or industries) with a large decrease in exports due to financial constraints are selected and focused on as a policy target, this would maximize the effect of policies while minimizing unintended side effects.
  The most salient feature of this report setting it apart from previous literature is that it applies proven methodology from previous research to Korean data, showing the part of decrement in exports caused by financial constraints. In addition, we found that these effects are different by firm and industry characteristics. Based on this report, future work using upgraded data will improve the estimation of the coefficient implying an accurate relationship between the diverse effects of financial constraints on exports by firm and industry characteristics, micro-finance policies and financial constraints under the control of various variables. Through this we ultimately hope to raise the effect of policies to improve the export growth rate.